Nortel Leaves All Doors Open

"Material Impact" might sound like the latest Jean Claude Van Diesel Willis movie, but it's actually the phrase de jour for Nortel Networks Ltd. (NYSE/Toronto: NT), which this morning provided the first in a series of biweekly peeks into its current business (see Nortel Updates on Restatements and Nortel Preps for Financial Update).

During this morning's conference call, the company's new top team of Bills -- CEO Bill Owen and CFO Bill Kerr -- were repeatedly asked by analysts to clarify exactly what "material impact" actually means. That's because Nortel has stated that, to the best of its current knowledge, the current restatement process will have "no material impact to prior period revenues" and "no material impact to the company's cash balance as at December 31, 2003."

According to Nortel, the restatement process, as noted previously, is concerned with the accrual of items on the balance sheet. Basically, financial items were included in the first half of 2003 when they should have been in 2002. As a result, 2003 net earnings are due to be halved, and the net losses for 2002 and 2001 will be reduced (see Nortel Rattles Nerves).

And that restatement process is set to run and run. Both Owen and Kerr stressed the detailed nature of the probe into Nortel's books, and that it's a slow and painstaking process. Neither could say when it would be completed, but it definitely won't be over during this current quarter.

So what's with the "material impact"? The clearest answer given was by Kerr, who said that if there are any adjustments made to recorded revenues, they won't be "material," but didn't go as far as to say what "material" means. He can't be any more conclusive than that because the restatement process is ongoing, and the financial statements for 2003 are still being picked over by internal and external accountants.

Owen and Kerr are understandably cautious. They have inherited an accounting mess, and don't want to say anything that might come back and bite them in the backside. So while Kerr doesn't expect revenues or the cash position to change, he can't put his hand on his heart and swear that'll be the case, because he doesn't know if the former management team, now departed, has left any other surprises that need fixing (see Dunn's Done With Nortel , Nortel Fires CEO, Nortel Gets Federal Subpoena, SEC Pops In on Nortel, and Nortel CFO Out ).

Kerr won't even hint at top-line figures for the first quarter of 2004 while Nortel has an open balance sheet for the end of 2003, even though the vendor announced in March that preliminary unaudited financial results for the first quarter would be provided at the end of April (see Nortel Sets Q1 Reporting Date). The new CFO noted that it was the "previous senior management" that had promised such figures, and not him.

The ongoing uncertainty was reflected in Nortel's share price, which is down 25 cents, more than 6 percent, at $3.83, giving the vendor a market capitalization of $16 billion.

So what can Nortel's big cheeses tell us for certain? Well, Bill Owen gave what could be described as a Churchillian speech to open the conference call, where he talked at length about what a great company Nortel is, and how fantastic the staff, customers, and products are. Aside from that, here are the main issues keeping Nortel's management busy:

Cash: The company has a lot of it -- $3.6 billion at March 31 this year. "We are focused on cash," said Owen. (And who isn't?!) "We'll drive cash any way we can. We want an ever increasing cash balance. It's important strategically," said the CEO. Why? "We need cash to play an effective role in the consolidation of this market." Nortel will be keeping a close eye on such recent consolidation moves (see Lucent Buys Softswitch Vendor Telica).

Costs: Owen and Co. are looking to cut costs back even further, "but that doesn't necessarily mean staff reductions," he said. Though, of course, it might. "We must make every effort to keep costs as low as possible. Our carrier customers place a lot of emphasis on driving costs out of their businesses," and Nortel needs to do the same, said the CEO. That need is made even greater because of...

Competition: Owen has spotted Huawei Technologies Co. Ltd., and he is taking the Chinese vendor very seriously. It has a "low cost base and quality products," he noted. "We have to look at competitors such as Huawei. We know we are going to come face-to-face with them, and need to get our costs as low as possible."

Compensation: Owen reckons there's a lot of misinformation in the market about compensation payments made to senior management. But he concedes there's a great deal of interest in them (see Nortel Silent on Baffling Bonuses). Having outlined why such payments and bonuses have been essential to retaining key staff, he said the triggers for those payments were being investigated, and "we will do the right thing" once the restatement process is over.

Tellingly, Owen noted that bonuses had been paid to Nortel's senior management, "based on the best information as provided to the board at the time." That information was provided by the same senior management that received the bonuses, he says.

After Steve Levy at Lehman Brothers applied some pressure, Owen said that once the restatement process was complete, Nortel would provide the pro forma financial figures that had been used to determine the bonus payments made to the senior staff. To date, only GAAP financial figures have been provided, while the pro forma numbers have been kept under wraps.

Current business: Nortel will outperform the telecom equipment sector, said Owen. "We expect the market to grow in the low single digits, and we'll grow revenues faster than the market." He added: "Our orders are good, our customers are satisfied, our business model is intact, and we have good business momentum." He wouldn't, however, comment on rumors that Nortel is about to land a monster $700 million GSM wireless infrastructure deal in India.

A further update is due in two weeks' time. What fun!

— Ray Le Maistre, International Editor, Boardwatch